Up until about 2006, buying a home was a relatively low risk proposition, even for first-time homebuyers. But now that mortgage underwriting guidelines are more difficult, and property values are bouncing up and down like a yo-yo, you need to be more informed before making a purchase.

Here are six money-saving tips that will make the process easier, and remove at least some of the risk involved in purchasing a home as a first-time home buyer.

6 Money Saving Tips For The First Time Home Buyer

1. Buy Beneath Your Means

This first tip is one where you will have to push back against your real estate agent. The conventional wisdom – which will be strongly advanced by members of the real estate community – is that you should buy the most expensive house you can afford. The idea is that you will be able to more easily afford it as the years pass and your financial situation improves. There may be merit to this, but it’s bad advice for a first time home buyer, especially in today’s market.

It will be better for you to buy at least a little below your financial means. This will leave more room in your budget to pay for everything else in your life. When you buy above your means, you’re flirting with being house poor. No matter how much you love the house, being house poor gets old fast.

2. Buy Below Market

To the best of your ability, try to buy house at a price that is below the going market price. You should aim to buy a house at least 5% to 10% below the prevailing market value. If the house is reasonably worth $200,000, you should try for a settlement price of between $180,000 and $190,000.

This will give you some extra equity upon closing on the house. More important, it will provide some insulation in the event property values should fall.

It’s easier to do this in some markets than others, but you should always try. You never know how anxious seller is to make a deal. Those are the kind of properties that you want to buy – the ones you can get at least a bit of a deal on.

3. Get A Home Inspection

Many times a first time home buyer will resist this idea, because it means coming up with an extra $300 or so before closing. But this can be the very best money you can spend in the entire transaction.

A home inspection can provide the following benefits:

It can alert you about needed repairs; if you know about these upfront, you can have the seller fix them before closing, saving you a major headache later.

You can use repairs and other deficiencies to negotiate a still lower price on the property. A home inspection often provides you with a list of bargaining chips.

It can reveal that the property is a complete disaster, allowing you to get out of the deal before closing.

Spend the extra money for the home inspection, you’ll be glad you did.

4. Use A Real Estate Agent

Property sellers sometimes like to work without real estate agents, so that they can avoid having to pay the real estate commission. As a buyer, there’s no real advantage to not having the services of real estate agent.

The agent acts as a third-party negotiator between you and the seller, and that tends to be more effective than face-to-face negotiations. This is especially true if there are significant issues that develop along the way to the closing table. The agent acts as both a go-between and a shock absorber, helping to work out mutually agreed upon terms.

In addition, since real estate agents work in the business all the time, they know how the process works. They can present a written offer, handle negotiations, schedule the closing and home inspection, and even help you select the mortgage lender and closing agent. If you are a first-time home buyer, you will have enough on your plate without having to worry about all of that.

5. Save Up More Than The Minimum Down Payment

It’s natural for first-time home buyers to want to buy with as little money as possible, but that’s not how the real estate business works these days. The minimum down payment with an FHA mortgage is 3 ½% of the purchase price. If you are using conventional financing, the new normal will be more like 10%, or even 20%.

You should have your down payment saved in advance, but that’s not all. You should have at least a few thousand dollars saved up in excess of your down payment requirement. There are at least three reasons for doing this:

On conventional mortgages, lenders require that you have “reserves” in excess of the down payment, equal to anywhere from 3 to 6 months of the new house payment.

The extra money will come in handy with incidental and unexpected expenses related to the purchase, such as moving, establishing utilities, making minor repairs, and last-minute purchases.

It’s never a good idea to be broke immediately after purchasing a new home. Save some extra money to give yourself some breathing room after the closing.

6. Clean Up Your Credit Before Applying For A Mortgage

Some first-time home buyers don’t bother reviewing their credit before applying for a mortgage, but it’s to your advantage if you do. If you wait and let the mortgage lender run your credit, and there are credit problems, your loan could be declined. But if you obtain a copy of your credit report in advance, and fix any issues that show up, your credit report will be “clean” by the time the lender pulls it. That will improve your chances of getting a mortgage approval.

The underwriting guidelines for mortgage loans are still quite a bit tougher than they were a few years ago. You will need to enter the process in the best financial shape possible. Determining the quality of your credit is something you can and should do in advance.

Follow these steps, and not only will buying your first home be easier, but you’ll find the entire transaction – and subsequent ownership – to be a much more pleasant experience.

With mortgage rates being at all-time lows many homeowners are looking to take the rate bonanza a step further by going for a 15 year mortgage. Not only will you pay off the mortgage in half the time, but you’ll get an even lower rate for doing it.

Sounds like a good deal right? Not necessarily, and certainly not for everyone.

Payment Shock With A 15 Yr Mortgage

Right now, you can get a 30 year fixed rate loan for around 3.25%. You can also get a 15 year fixed rate for just 2.75%. As far as rates are concerned, comparing the two is the perverbal “no brainer”, right?

No so fast.

In a pure mathematical sense, rates matter a lot. But real life and math equations are two very different things. In the real world, rates matter mainly as a tool in reducing a monthly payment. But in this comparison—the lower rate of the 15 year mortgage will not reduce the payment.

No matter what the rates are on either loan type, the payment on the 15 year loan will always be higher than it is on the 30 year loan.

If your mortgage balance is $200,000, and you refinance to a 15 year loan at 2.75%, the monthly payment will be $1,357 per month. If you refinance the same loan amount for 30 years at 3.25%, the monthly will be only $870. That’s a difference of $487 per month! How does an annual rate savings of .50% look against a monthly payment that’s nearly $500 higher?

Put another way, the payment on the 15 year loan is more than 50% higher than it is for the 30 year. You’d have to think long and hard about whether or not that’s an advantage. For most people, it will be more of a nightmare.

No Immediate Benefit From A 15 Year Mortgage

This is another point that I don’t think most borrowers fully appreciate. While it’s true that you’ll pay off a 15 year mortgage in half the time that you will a 30, there will be no immediate benefit for doing so.

You will have to make the higher monthly payment for 15 years—that’s 180 monthly payments—before you’ll see the fruits of your labor.

When you sign up for a 15 year mortgage, you lock in the higher payments for the entire length of the loan. The payment will remain fixed for the entire term. Yes, you will be paying your mortgage off much sooner, but the day-to-day cost will be substantial.

With 15 year mortgages, virtually all of the benefit of the loan comes at the very end, when the house is owned free and clear.

There’s No Turning Back

Along the same line, once you take on a 15 year loan, you’re locked into for the duration. Yes, it will pay your mortgage off sooner, but if you lose your job or face some other financial disaster while the loan is still outstanding, the higher payment will sting.

You won’t be able to call up your lender and say “we made a mistake, can we go back to the 30 year loan?” Yes, you can refinance, but if you have no job or your credit has deteriorated since closing on the loan, you may not qualify for a new one.

15 years is a very long time when you’re making a high payment.

The Disappearing Income Tax Deduction

One of the biggest benefits of having a mortgage is that it’s one of the last solid tax deductions available to the average taxpayer. Medical deductions are reduced by 7.5% of your adjusted gross income, and credit card- and auto loan-interest aren’t deductible at all. But mortgage interest remains fully deductible. That can be a substantial tax savings, especially for high income taxpayers.

But since a 15 year mortgage pays off quicker than 30 year loan, they also make the tax break go away sooner. It’s not just the loan balance that goes away—the tax deduction goes with it.

Neglecting Other Financial Needs

When it comes to 15 years mortgages, there’s a definite opportunity cost. In the example above of the payment difference on a $200,000 mortgage, the payment on the 15 year loan was higher by $487 per month. That’s almost $6,000 per year!

That begs the question: what else could you be doing with $6,000 each year?

All of these are at least as worthy as paying off your mortgage early, and most of them will be more immediate in their impact. $6,000 per year could be putting out a lot of financial fires and/or funding a lot of accounts. By loading all of it onto a single venture—paying off your mortgage in half the time, you deny yourself access to the money to do other things.

When I was a kid, one of the things that I remember about home ownership is that people would have to save up for a long period of time in order to be able to put down at least 20% of the purchase price of the home as a down payment. However, over the past 10-15 years, the practice of planning a home purchase based on when you could save up a 20% down payment has essentially become obsolete.

What Is Private Mortgage Insurance (PMI)?

Because of this failure to come up with the standard down payment, more and more people began paying private mortgage insurance premiums during the real estate boom of the mid 2000s. Private mortgage insurance (or PMI) is insurance that is in place to ensure that mortgage lenders do not lose money in the case where a mortgagor is not able to repay the loan, and the full costs cannot be recovered even after a foreclosure and sale of the property.

Because of this, private mortgage insurance is usually required when the borrower is putting up less than 20% of the purchase price or appraised value of the home. The cost of your insurance will vary depending on the size of the down payment and the loan and the location of the property (like one of these retirement havens), but they typically amount to about one-half of 1 percent of the loan – which would be about $2000 a year on a $400,000 house.

PMI definitely makes sense from the lender’s perspective, since they are taking on more risk by extending a loan that is at or close to the value of the property. In some cases you will actually pay an upfront premium in addition to the ones baked into your mortgage payments.

PMI is an extra fee that can add a substantial amount to your monthly mortgage payment (especially when you consider interest, homeowner’s insurance, and taxes), and you may be required to pay this amount until the equity you have in your home reaches the twenty percent threshold.

How To Stop Paying Private Mortgage Insurance:

If you currently owe less than 80% of the value of your home and are still paying PMI, contact your mortgage company immediately for instant savings (it issupposed to be canceled automatically once you owe less than 78%). They will require proof that your equity position is stable and is more than 20%.

That “proof” will come in the form of an independent appraisal. Unfortunately, you are usually not given a choice regarding the appraiser or the total amount of the fee; but at least you get to pay for it (sometimes at a cost of $500 or more)!

If you still owe more than 80% of the value of your home, but you have enough money in savings (“enough” is relative), it may make sense to pay down your mortgage in order to stop paying these fees.

My Thoughts About PMI

To me, it doesn’t make sense to pay insurance premiums for a plan that doesn’t even cover me . I wonder how many people actually add PMI to the equation when figuring out if it’s time to buy a home. What was that? Most people don’t make any calculations when trying to buy a home? Well, then I guess they won’t mind paying an extra couple of hundred dollars (with the home prices in my state) per month in order to grab a piece of the “American dream”. Maybe you can buy a home overseas instead! 😉

Seriously, how many other types of insurance can you think of where the one paying the premium doesn’t benefit at all from the protection offered by the coverage? And to me, if a loved one benefits, then I benefit, so you can’t add any types of life insurance to that list.

If you have crunched the numbers and you can tell me that it is better for you financially to rush into buying a home with little to no down payment and paying PMI, then maybe there may be some merit to this; but as far as I can see it (in most cases that I have observed), it is a huge waste of money, and it is another cost of being financially unprepared and undisciplined!

For many, many years the renting-vs.-owning question was a done deal when it came to housing. Everyone who could own a home did, and everyone who couldn’t aspired to do so as soon as possible. Is that still true today? Is renting a better option? And if so, what changes have caused it?

Renting Vs. Owning: 5 Reasons You May Be Better Off Renting

House Prices Aren’t Rising Any More

When house prices were rising steadily owning made far more sense than renting. You were building wealth in the form of increasing home equity while you were living in the property. But that dynamic has been missing for the past five years and even if it does return, it’s unlikely that it will be anything like the price increases we’ve seen in the past.

Consider the following:

Mortgage rates are at historic lows, house prices are lower than they have been in years, and yet prices show few signs of recovery

The 76 million-strong Baby Boom generation have entered the retirement years—a typical time of trading down or selling off housing completely

Generation Y is showing nothing like the fever to own a home that previous generations did

Millions of households have been impaired by the financial meltdown, effectively removing them from the housing market for a very long time

Though employment has been improving, jobs security is conspicuously absent

It seems that the combination of these factors are putting a lid on house prices and probably will for the foreseeable future. And if prices aren’t rising, there’s no imperative to own right now. Better to rent and see how it all plays out.

Freedom To Follow The Jobs

Let’s spend a little more time on item #5 from above. When you buy a home you’re usually signing a mortgage note that will bind you to the house for something like 30 years. Can you conceive of a job that you’ll have for 30 years?

Probably not.

Jobs and even careers are becoming notoriously unstable for reasons that appear to be beyond the financial meltdown. A 30 year mortgage requires some level of income stability for the term of the loan, and that may require not just changing jobs, but also uprooting to follow them to distant places.

If you have to make a geographic move to find work in your field, owning a home will complicate matters. You’ll have to sell or rent out your home in order to make the move. And if you can’t do either, you may have to pass up the job opportunity.

When you rent, it’s far easier to pick up and follow a job.

A House Is A Capital Trap

It’s not just a mortgage you have to contend with when you buy a home; you also have a down payment tied up in it. That wasn’t much of a problem when you could easily sell a home after just a few years—for more money than what you paid for it—or borrow out the equity any time you wanted. Today, your down payment is likely to be tied up for many years.

In addition, when you own a home you have to put money into repair and maintenance, adding thousands of dollars to the money you already have tied up in the house.

At a time when so many people are dealing with job and career issues, as well as debt problems, can you afford to tie up thousands of dollars in equity in a house? When you rent, all of your money can be held in liquid accounts ready for your use.

Maximum Financial Flexibility

Here’s something we don’t like to think about too much…if you were to experience a permanent income reduction, what would you do to lower your house payment to adjust to the smaller paycheck?

If you rent, you can move to a lower priced home or apartment, or even move in with family. If you own, you first have to sell your house. In today’s market, selling a house can take months or even a year or more. Worse, if you’re in a negative equity position, you may not be able to sell at all.

Renting provides the financial flexibility that’s more consistent with today’s economic and employment circumstances. Owning, because it’s long term in nature, is rigid and locks you into a lifestyle you may not be able to sustain—or get out of.

Some people may consider such thinking to be negative; I consider it being prepared.

The Mortgage Interest Income Tax Deduction Isn’t What It Used To Be

Real estate agents often hype the mortgage interest and real estate tax deductions as a compelling reason to own a home rather than to rent. Renting, after all, offers no income tax deduction. Two factors are now weighing against that assumption though.

First, interest rates are at very low levels—a 4% interest rate on a $150,000 mortgage, will produce only a $6,000 mortgage interest deduction. Second, the standard deduction is $11,900 for a married couple filing jointly in 2012; it’s possible that even owing a house will not get you any more than $11,900 in deductions. At best, you may only get additional deductions on part of your housing costs, but nothing like the 20%, 30%, or 40% deduction agents are quick to point out.

The mortgage interest and real estate tax deductions continue to be a real factor for higher income households buying higher priced homes. But for many middle class households, and most lower income ones, the deduction will make only a minor improvement in your cash flow.
Am I saying you shouldn’t buy a house? In many cases, yes, that’s what I’m saying. It’s not as “right” as it was a few years ago, not for a lot of people. Consider the value of owning against the possibility that the home could drop in value—would you buy knowing that might happen? Do you feel your job/career is stable enough that you’ll be able to make the payments and not need to move to another city for the foreseeable future? Is your financial situation strong enough that you could weather a prolonged period of unemployment and still keep up the house payments?

These questions were always a part of the homeownership equation—they’re just more relevant now than ever.

What do you think about owning versus renting today? Do you think the pendulum has swung in favor of renting?

Yes, the title of this article is correct. After the North Carolina based Bank of America foreclosure procedure backfired, the homeowner was able to foreclose on the bank!

Bank Of America Foreclosure Gone Wrong

According to a story on Digtriad.com, the Bank Of America foreclosure was filed against the home of a couple who didn’t even have a mortgage. This is another reason why becoming a cosigner on a loan is so risky (lenders make terrible mistakes all the time)! They owned their home outright! The couple said they paid cash for the house:

The case went to court and the homeowners were able to prove they didn’t owe Bank of America anything on the house. In fact, it was proven that the couple never even had a mortgage bill to pay.

What I want to know, is what in the world make BOA believe that the couple owed them money on this home, when they never even had a mortgage (this is the reason why I am trying to pay off debt)! It’s really bad when buying a home with cash is as risky as investing in Brazil!

Since it was the bank that filed this wrongful foreclosure, they were ordered by the judge to pay the legal fees of the homeowners.

I guess you’re wondering how did it go from BOA owing them a few thousand dollars, to the homeowners being able to foreclose on the bank!

Bank Of America Foreclosure In Reverse

From this point on, the story looks identical to Bank of America foreclosure proceedings, except now the bank is the one who owes a debt:

After more than 5 months of the judge’s ruling, the bank still hadn’t paid the legal fees…”They’ve ignored our calls, ignored our letters, legally this is the next step to get my clients compensated, ” attorney Todd Allen told CBS.

So, now the bank is the one who is late paying a debt, and refuses to even work with the homeowner! Well, what do you do when someone (or some company) legally owes you money, refuses to pay, refuses to speak to you, and owns property? You seize their assets!

Sheriff’s deputies, movers, and the Nyergers’ attorney went to the bank and foreclosed on it. The attorney gave instructions to to remove desks, computers, copiers, filing cabinets and any cash in the teller’s drawers.

This had to be an amazing scene. Could you imagine seeing all of the bank’s cash (damaged money and all), furniture, equipment, and workers all sitting out on the lawn? Fortunately, it didn’t have to go that far; although, this should have been settled months ago!

The wrongful Bank of America foreclosure is what caused this mess in the first place, and now they don’t want to pay the homeowner what they rightfully deserve!

Here is how this hilarious situation ended:

After about an hour of being locked out of the bank, the bank manager handed the attorney a check for the legal fees.

I’m sure they have to deal with a lot of people who owe them hundreds of thousands of dollars, but still fight against the foreclosure process (as if they did nothing wrong); but that wasn’t the case here! They should have written out this check as soon as the judge ordered them to pay the homeowner’s legal fees!